Overview of the Merger
R i
Review
P
Process
Scott P
P. Perlman
Mayer Brown LLP
The Conference Board
Post Merger Integration Conference
J
June
25,
25 2008
U.S. Merger Review Process
Purpose of U.S.
U S Federal Merger Review:

•
•
•
Proposed Mergers, Acquisitions and Joint Ventures are
reviewed by Department of Justice (DOJ) & Federal
Trade Commission (FTC).
Review focuses on whether proposed transaction will
confer “Market Power” upon newly merged company.
Agencies look to see:
•
Will newly merged company have ability to raise prices above
competitive levels;
•
D
Decrease
quality
lit or output
t tb
below
l
competitive
titi levels;
l
l or
•
Eliminate competition.
2
U.S. Merger Review Process
•
DOJ and FTC use their 1992 Horizontal Merger
Guidelines to make this assessment.
assessment
•
Merger Guidelines focus on following factors:
•
•
•
•
•
Defining relevant market(s) – product (parties’ overlapping
products and close substitutes) and geographic (local, regional,
national or global?);
Effect of merger on market concentration – analyze market
shares of merging parties and competitors and the resulting
level of concentration;
Likelihood of anticompetitive effects – higher prices, reduced
quality or innovation;
New entry or expansion by existing market participants – timely,
lik l and
likely
d sufficient
ffi i t to
t deter
d t anticompetitive
ti
titi effects;
ff t and
d
Merger--specific efficiencies.
Merger
3
Hart--Scott
Hart
Scott--Rodino Review Process
DOJ and FTC review most mergers under HartHart-ScottScottRodino Act ((“HSR
HSR Act
Act” or “Act”),
Act ), 15 U.S.C. § 18a.




Passed in 1976 to deal with “midnight mergers” closed by
parties
ti before
b f
governmentt could
ld investigate.
i
ti t
Requires parties to acquisitions of assets, voting securities,
controlling interests in noncorporate entities (partnerships,
LLCs) meeting certain dollar thresholds to submit premerger
notification forms to FTC and DOJ and observe statutory
waiting
iti period
i d – usually
ll 30 days
d
– before
b f
closing.
l i
Allows FTC/DOJ to challenge proposed deals – e.g., agencies
may seek to enjoin proposed transactions in court.
4
Hart--Scott
Hart
Scott--Rodino Review Process

HSR Act jurisdictional dollar thresholds:
1. SizeSize-of
of--persons threshold
threshold:: “person” on one side of transaction with
$126.2 million or more in total assets or annual net sales and
person on other side with $12.6 million or more in total assets or
annual net sales ((“person”
person is ultimate parent on each side–assets
and sales based on most recent, fully consolidated financials).
2 Si
2.
Size
Sizee-of
of--transaction
t ansa tion threshold:
threshold
th eshold: transaction
t ansa tion valued
al ed at more
mo e than
$63.1 million.



Transactions valued in excess of $252.3 million are reportable
regardless of size of persons.
Act has many exemptions – e.g., acquisitions in ordinary course of
business real estate
business,
estate, foreign assets and entities
entities.
Blunt Instrument – 80+% of reportable transactions – no investigation.
investigation.
5
Hart--Scott
Hart
Scott--Rodino Review Process
When HSR filing is required, each party must submit copies of
premerger
p
g notification form to both DOJ and FTC:






Timing – anytime after execution of letter of intent or agreement.
Information required – financial statements, SEC filings, revenue by
NAICS Code, lists of subsidiaries and minority shareholder interests.
Parties’ NAICS Codes overlap – identify geographic areas in which
Parties
overlapping products are sold.
Item 4(c) – requires submission of documents prepared by or for
officers or directors that evaluate proposed transaction with respect to
competition, markets and other similar issues.
Acquiring person is required to pay filing fee – can range from $45,000
$45 000
to $280,000, depending on value of transaction.
6
Early Termination

Parties can request early termination (ET) of
30--day waiting period.
30



Generally
G
ll granted
d in
i 22-3 weeks
k if no substantive
b
i
issues.
Disadvantage to ET – names of parties published
on FTC web site, Federal Register – but ET is
requested on 80+% of filings.
ET not requested – if no substantive issues,
issues
period expires without public disclosure.
7
Agency Investigations
Once filing is made – DOJ and FTC determine whether
preliminaryy investigation
p
g
is warranted.



Approximately 1 in 5 HSR filings result in preliminary
investigations.
Factors going into decision:



Agencies
Agencies’ familiarity with industry.
Role played in that industry by merging parties – degree of overlap
that appears to exist between parties and degree of competition
they face based on HSR filings
filings.
Information included in Item 4(c) documents, including statements
indicating an anticompetitive intent (e.g., “If we do this deal we
can raise
i prices
i
20%,
20% high
hi h entry
t barriers
b i
will
ill preventt new
competition,” etc.).
8
Agency Investigations




If there is an investigation, only one agency actually will
review transaction
transaction.
Determination of which agency will investigate is made
through “clearance process.”
In general, agencies complete this process in first 1010-days or
so after HSR filing is submitted – is based on past history,
expertise (Rx – FTC,
FTC air lines – DOJ).
DOJ)
In some cases -- extended clearance battles ((AOL/Time
Warner – 45 days, Pacific Enterprise/Enova – 5 months).
9
Agency Investigations

Reviewing agency will assign investigation to particular shop or section.

Staff attorney from investigating shop/section will contact parties’
parties counsel with
request for basic information, including:


List of Top 10
10--20 customers – agency will call these customers to determine their
reaction to transaction – major factor in whether transaction will be challenged
challenged.

Recent strategic and marketing plans.

Win/loss reports.
reports

Information about manufacturing capacity.

Other transactiontransaction-related documents not provided with filing
filing.

Interview company executives.
Parties may make written submissions,
submissions inin-person presentations
presentations, hire economist to
address agency economist concerns.
10
Second Request






End of 3030-day period, agency concludes no problem – period terminated
or expires.
p
End of 3030-day period, agency continues to have concerns – will issue
“request for additional information” commonly known as “second request”
(issued
( ssued in 2%2%
%-4%
% of
o HSR
S filings).
gs)
Second request – subpoena requesting a broad range of documents/data.
Responding – often very burdensome,
burdensome timetime-consuming,
consuming expensive
expensive.
(Parties can avoid by withdrawing filing, rere-filing to give agency extra
time; no fee if buyer rere-files within 48 hours of withdrawal).
Proliferation of ee-mail,
mail other electronic documents/data has increased
production costs significantly, may require engaging electronic discovery
consultant.
Compliance can take 11-2 months or 66-8 months or more depending on
complexity of parties, transaction – can cost several million dollars.
11
Second Request

Information typically requested in second request:








Organizational charts
Detailed descriptions of each relevant product
Product brochures
Business
u
plans
pa
All documents relating to competition in relevant
product and geographic markets
Documents regarding entry and planned expansions
Detailed data regarding sales and prices
All documents relating to proposed transaction
12
Second Request

P i usually
Parties
ll negotiate
i
to narrow request – limit
li i number
b off custodians,
di
time period covered.

Once parties believe they have provided reviewing
g agency
g
with
sufficient
ff
information,
f
can certify
f ““substantial
b
l compliance”
l
” with
h request.

Agency decides if parties have complied – may lead to disputes.

Compliance triggers a second statutory waiting period – usually 30 days.


During second request process – reviewing agency’s attorneys and
economists may request additional information not covered by request
request,
depose company executives.
Parties may make additional submissions (e.g., white papers),
presentations meet with agency attorneys and economists
presentations,
economists.
13
Second Request
Because of burdens imposed by second request,
parties mayy choose not to comply.
p
py




Instead, parties can work with agency to produce
narrower set of information.
Agency may offer to defer compliance and conduct “quick
look” review focused on keyy issues,, such as market
definition or entry – if satisfied will close investigation; if
not, parties must comply with request.
Problem with avoiding compliance – eliminates time
constraints on government, can lead to prolonged
investigations greater expense if compliance later is
investigations,
necessary.
14
Second Request Reforms
FTC and DOJ reforms attempt to streamline review process:


Parties can elect a “Process and Timing Agreement” option:




Reforms may reduce second request compliance burden, but come with
tradeoffs:




Limits number of employees whose files are searched to 3030-35;
Limits time period covered by request to 2 years;
Requires the preservation of fewer backback-up tapes and maintenance of a reduced
privilege log.
Must make employees available for interviews;
Waive objections;
If transaction challenged must agree to extended discovery period (minimum of a
60--day discovery period for FTC and 4 to 6 months for DOJ);
60
Parties and counsel need to consider whether reduced p
production burden is
worth it.
15
Second Request
End of second request waiting period:






A
Agency
concludes
l d no problem
bl
– can grantt early
l termination
t
i ti or allow
ll
waiting
iti
period to expire, enabling parties to close.
After approval agency can come back to challenge transaction – very rare.
Agency wants more time – required to go to court but parties usually agree to
extension (e.g., agree not to close without prior notice).
Agency staff recommends challenging transaction — can appeal up the line
(DOJ — front office, Assistant Attorney General; FTC
FTC—
—Bureau of Competition
Director, Commissioners) — if appeal fails, agency will go to court to seek
preliminaryy injunction
p
j
(“PI,”
(
if granted
g
usuallyy ends deal),
) or parties
p
mayy
abandon transaction.
Litigation for permanent relief (may be combined with PI) – DOJ must seek
permanent injunction
p
j
in court,, FTC can use administrative process
p
– if litigated
g
can add months to process. Government has lost major cases in recent years
(DOJ – Oracle/PeopleSoft; FTC – Arch Coal, Foster, and Whole Foods [FTC PI
motion denied, appeal pending]).
16
Consent Decrees
Consent Decrees:






Any point in process – parties can negotiate consent decree (60%
(60%-70% of second requests end in challenge or request for consent).
Negotiated between parties and reviewing agency to resolve agency
concerns.
Usually involves divestiture of subsidiaries or divisions, assets (plants,
stores), license of patents or other intellectual property.
Allows
ll
parties
i to conclude
l d deal
d l without
ih
it
i being
b i challenged
h ll
d in
i court.
Upon approval by agency is placed on public record for comment (DOJ
d
decree
– 60 d
days, FTC decree
d
– 30 days)
d ) – parties
ti permitted
itt d tto close
l
during comment period, comments rarely result in changes.
17
Merger Review Outside of HSR Process

If HSR filing is not required:




DOJ and FTC may learn of deal through customer or competitor
complaints, press reports.
Agencies have authority to review any proposed or consummated
merger they believe will have anticompetitive effects.
If transaction is challenged absent HSR filing – agencies are not
constrained by HSR time limitations – investigation may take
longer, particularly if agency has to prioritize HSR investigations.
Parties can close at any time but may not be in their interests to
close over agency objections – creates ill will, government could
seek an injunction – parties more likely to work to convince
agency
g
y no problem.
p
18
State Merger Review
State Attorneys General may investigate merger even if it is
subject to HSR review
review. Particularly when merger:


Raises issues of local concern.

Has significant
g
impact
p
on consumers.

Involves politically “hot” industry:




Hospitals
Health insurance
Supermarkets
Oil refineries, gas stations, etc.

Generally, federal agencies take lead.

If local issues are prevalent, however, state can play pivotal role:

Wal--Mart Stores v. Rodriguez, 23 F.Supp.2d 395 (D.P.R. 2002).
Wal

Puerto Rico sought P.I. despite FTC consent order (grocery stores)
19
Multi--Jurisdictional Merger Review
Multi



Transactions may be subject to premerger
notification requirements in other countries.
Today, more than 80 countries have merger
control statutes.
Most significant foreign jurisdiction for U.S.
companies re merger control – European Union
(EU).
20
European Union



Unlike HSR filings,
filings initial filings under EU Form CO require
parties to provide detailed descriptions of products and
markets.
Generally, merger review by EU will produce same result as in
US
U.S.
There have been conflicting
g results,, however:

E.g., GE/Honeywell (Approved by DOJ but rejected by EU);
Sony/BMG (approved by FTC, rejected by EU).
21
European Union
A filing in the EU is required when:



AND
Merged companies'
worldwide
ld id turnover
t
would
ld
exceed €5 billion;
And
Combined EEAEEA-wide
turnover of at least two
companies
i individually
i di id ll
exceeds €250 million.
Post-transaction worldwide
Postturnover would exceed €2.5
25
billion;

OR
Post-transaction EEA
PostEEA--wide
turnover of at least two
companies would exceed €100
million;
AND

Post-transaction turnover would
Postexceed €100 million in at least
th
three
member
b states;
t t
AND

In each of these three member
states, turnover of at least two of
parties to deal exceeds €25
million.
22
Individual Countries
If EU p
premerger
g filing
g is not required,
q
, merger
g laws of
individual member countries apply:




Germany – probably European country in which U.S. companies are
required to file most often.
Outside of Europe – Canada, Mexico, Brazil
Brazil,, Argentina,
South Africa, Israel, South Korea – countries in which U.S.
companies frequently must file.
China recently enacted merger reform that requires
premerger approval of transactions exceeding certain
threshold – not clear yet what affect this will have on U.S.
companies.
23